The Morning Ledger: Economists See Second-Half GDP Growth of 3%

The Wall Street Journal’s latest monthly forecasting survey of 43 economists concludes that the business sector holds the key to accelerated growth during the second half of the year. The respondents see the sector building on the economic growth visible after the effects of a harsh winter. According to the survey, real gross domestic product will grow at an annual rate of just under 3% in the third and fourth quarters, putting GDP growth over the full year at 2%. Real GDP contracted at a 2.1% annual rate during the frosty first quarter but surged by 4% in the second quarter, Commerce Department data says. Despite a large increase in business inventories boosting spring growth, some economists are not convinced it will last. John Silvia of Wells Fargo estimates slower stockpiling will subtract 0.6 percentage point from this quarter’s GDP growth. The five most optimistic economists see growth speeding up to 3.5% or better in the second half and are counting on the business sector to ramp up capital spending. The consensus on cap ex for the second half is 5.9%.

THE DAY AHEAD

At 10:00 a.m. the monthly wholesale trade, sales and inventory numbers for June will be released. The consensus is for a 0.6% increase, according to Calculated Risk.

EXCLUSIVE ON CFOJ

Many Senators Object to Raising Cash from Small Businesses. A group of senators object to plans by Congress to force small businesses to change accounting methods in order raise revenue to support tax reform, the WSJ’s CFO Journal reports. Some 46 senators sent a letter Wednesday to Senate Finance Committee Chairman Ron Wyden (D., Ore.) and Ranking Member Orrin Hatch (R., Utah), opposing proposals that would force some small businesses to use accrual accounting, rather than cash accounting. The shift would essentially force firms to pay income taxes on money not yet received. The changes could raise more than $23 billion in tax revenue over the next decade, but the senators said the “negative impact” couldn’t justify the change. “The basic tenet of taxation is ‘ability to pay,’” they wrote. The changes, which have been in draft proposals by the House and the Senate in the past year, would affect businesses with more than $10 million in revenue that don’t currently have inventory, such as dentists, architects, engineers and attorneys and CPAs. The senate version could also affect farmers.

CORPORATE NEWS

Fannie, Freddie Settle into Post-Crisis Norm. Mortgage-finance giants Fannie Mae and Freddie Mac reported weaker second-quarter earnings amid a decline in income from crisis-era settlement agreements. But the WSJ reports that the government-controlled companies’ profits were still strong enough to send $5.6 billion to the U.S. Treasury. Fannie Mae reported net income of $3.7 billion in the second quarter, down from net of $5.3 billion in the first quarter and $10.1 billion in the same quarter last year. Freddie Mac saw net of $1.4 billion, compared with $4 billion in the first quarter and $5 billion in the second quarter of 2013. For the past couple years, the companies’ earnings have been distorted by one-time gains. The companies’ executives said Thursday that gains from one-off tax benefits and major legal settlements were now a thing of the past. Such events added tens of billions to the companies’ bottom lines in the past couple years.

MetLife Settles After Fax Meets Friction. MetLife Inc., the nation’s biggest life insurer by assets agreed this week to pay a $23 million settlement to resolve two class action lawsuits, the WSJ reports. The suits alleged MetLife sent millions of faxes to potential customers, falling foul of a federal law prohibiting unsolicited appeals by phone or fax, unless they meet certain criteria. The company “vigorously disputes any liability,” but under the settlement will pay between $50 and $3,500 per claim, said David Oppenheim, a lawyer with Illinois firm Anderson & Wanca representing the plaintiffs.

ECONOMY

Russia Bans Food Imports in Retaliation for Western Sanctions. Russia has laid out a list of banned food imports from the U.S. and Europe, as it retaliates against economic sanctions imposed on the country for its role in the Ukrainian crisis. Prime Minister Dmitry Medvedev said the one-year ban includes beef, pork, poultry, fish, fruit, vegetables, cheese, milk and other dairy products from the U.S., Canada, the European Union, Norway and Australia. The prime minister also announced a ban on Ukrainian flights transiting through Russian airspace, and warned that Russia could issue a similar ban on U.S. and European planes. Many American and European carriers fly over Siberia to reach destinations in Asia. The Wall Street Journal writes that while the list appeared tailored to avoid hitting ordinary Russian consumers too much, some economists said it could backfire by driving up domestic food prices, at least in the short term. Obama administration officials said the impact of the ban on the U.S. economy would likely be insignificant.

Junk-Bond Exodus Accelerates. Investors pulled a record $7.1 billion from junk-bond funds in the week ended Wednesday, fund tracker Lipper said. The outflow marks the fourth weekly decline as investors yanked money from mutual and exchange-traded funds dedicated to high-yield debt. The trend marks a departure from the steady stream of inflows recorded early in the second quarter, WSJ writes. After taking in $2.61 billion in May, junk bond funds suffered about $1.14 billion of withdrawals in June and an additional $5.4 billion of outflows in July. Of the latest week’s $7.1 billion outflow, about $1.3 billion came out of ETFs, said Jeff Tjornehoj, head of Lipper Americas research. Many investors have withdrawn from the market amid concerns that the bonds are overvalued and that a strengthening U.S. economy could prompt the Federal Reserve to raise interest rates sooner than the market currently expects.

Fresh Foreclosure Cases Fall to Lowest Level Since 2006. The rate of fresh foreclosure proceedings has fallen to the lowest level in eight years, the WSJ writes. The Mortgage Bankers Association reported Thursday that foreclosure proceedings began on just 0.4% of mortgages loans during the second quarter. That was down from 0.45% in the first quarter and far below the 1.42% rate seen at the crisis’s worst point in the third quarter of 2009. The drop is the latest evidence that an improving economy and rising home values are preventing greater numbers of homeowners from falling behind. Meanwhile, the mortgage delinquency rate was a seasonally adjusted 6.04%, the lowest since the end of 2007 and down from 6.11% in the first quarter.

REGULATION

Three Private Equity Firms Agree to Settle Lawsuit on Collusion. Three of Wall Street’s leading private equity firms have agreed to pay a combined $325 million to settle accusations of collusion to drive down the prices of corporate takeover targets. KKR & Co. LP, Blackstone Group and TPG agreed to settle all claims without admitting wrongdoing, the New York Times reports. The firms will decide among themselves how to split the payment, according to a court filing Thursday. Of the seven defendants in the case, all but one – the Carlyle Group, have now settled. Three defendants — Bain Capital, Silver Lake and Goldman — agreed in recent months to settle the claims against them for a combined $150.5 million. The latest agreement, if approved by the Federal District Court in Massachusetts, would resolve the role of the private equity firms in a seven-year-old lawsuit filed by former shareholders of companies that the firms acquired during the boom times before the financial crisis.

Hyundai Accepts Fine for Delayed Recall. South Korean auto maker Hyundai Motor Co. has agreed to pay a $17.4 million fine to U.S. regulators for delaying the recall of 43,500 vehicles to fix a brake defect. The company recalled the vehicles in October 2013 following an investigation by the National Highway Traffic Safety Administration. Hyundai agreed to pay the fine—the maximum allowed by law at the time —after failing to notify regulators in a timely manner that certain components on 2009 through 2012 Hyundai Genesis sedans were defective. NHTSA said General Motors Co. also had the same defective brake parts but it recalled the vehicles in 2012. The fine comes as auto makers and U.S. safety regulators face heightened scrutiny over the timeliness of safety recalls.

CFO MOVES

USA Truck Inc., a transportation company based in Van Buren, Ark., said Clifton Beckham will resign as chief financial officer, effective Sept. 30 “to pursue new career opportunities.” The company is conducting a search for a replacement. If it finds a candidate before Mr. Beckham’s departure, the board will name an interim CFO. Mr. Beckham will be compensated at his usual salary through Aug. 31, and he will be compensated at his usual salary plus $25,000 for the month of September. He also will earn his usual salary plus $1,136.36 per business day during “the extension term, if any,” according to a regulatory filing.

OncoGenex Pharmaceuticals Inc., a biopharmaceutical company based in Bothell, Wash., hired John Bencich as CFO, effective Aug. 11. Mr. Bencich was previously CFO of Diagnostics Inc. OncoGenex did not immediately release compensation information.

THE WEEKEND READER

Boston Globe: Is Shareholder Value Bad For Business? The decision this week by drugstore chain Walgreens to go against the will of shareholders and remain domiciled in the U.S. following its merger with a European outfit, is just one of many acts in the ongoing morality tale about what it means to run a corporation in latter-day America. Does one do ‘the right thing’ by opting for what’s best for ‘shareholder value’ or for wider ‘society’? That question is threatening to rip apart Massachusetts-based, family-owned grocery store chain Market Basket, whose unfolding story is being told in the Boston Globe. Operating across three New England states, Market Basket board members dismissed the popular company CEO Arthur T. Demoulas and two executives on June 23. Loyal staff and sympathetic customers didn’t like that: so now the staff are on strike and customers have boycotted the stores, threatening the business’ very existence. “This controversy is the tip of an iceberg,” said James Post, coauthor of the 2002 book “Redefining the Corporation” and a professor emeritus at Boston University School of Management. “And what’s below the iceberg is a much larger debate about the relationship between shareholders and all of the other parties that help account for the success of a company.”

Arrogance is Good: In Defense of Silicon Valley. Silicon Valley, specifically the bright young males populating its startups, have had a bad press of late. Already pilloried for pricing Californian residents out of house and home, accusations of sexism, narcissism and frat-boy arrogance at work and play also abound. And there are those inside the Valley and out, who think that its collective, entrepreneurial brain-power could be put to more enduring use – for solving problems bigger than the next iteration of a smartphone game. Bloomberg Businessweek examine these stereotypes, then look beyond them for any redeeming qualities. Silicon Valley and its young and carefree engineers may be changing the world, but is that for better or worse?

Lions go global: Deepening Africa’s ties to the United States. Following the inaugural U.S.-Africa summit in Washington this week, this comprehensive article from McKinsey & Co. highlights opportunities in Africa for the U.S. to play investment catch-up with the rest of the world, and with China in particular. It declares Africa is transforming from a continent in need of assistance to a continent of opportunity. And it makes the increasingly familiar point that the U.S. foreign direct investment in Africa currently lags behind Europe, BRIC and the Middle East, despite the continent exhibiting economic growth rates second only to East Asia: “Africa was home to 8 of the world’s 15 fastest-growing economies between 2000 and 2013. Indeed, the continent’s GDP of more than $2 trillion in 2013 is now larger than India’s.”

Deloitte's Financial Reporting Alert discusses certain key accounting and financial reporting considerations related to the current economic conditions in the eurozone and Puerto Rico, including a summary of financial reporting implications that would result from a country's decision to exit the eurozone and an outline of disclosures recommended by the SEC in 2012 about European sovereign debt.